In a high-stakes trademark poker game, Google called what might or might not be a bluff on the part of an online seller of home decorating products. Today, Google asked a U.S. district court to rule on whether some of the keywords it sells to advertisers infringe on the trademarks of American Blind and Wallpaper Factory.

The result of this dispute could be a groundbreaking legal precedent on competitive advertising online.

Google's latest legal trouble started in July 2002, when a law firm representing American Blind sent Google a letter complaining that it was selling AdWords that infringed on its trademarks. Included was a list of more than 30 terms, which ranged from those that seem obvious, such as "americanblindandwallpaperfactory.com" to more generic terms, such as "american wallpaper discount."

That September, counsel for Google called an executive at American Blind and explained that Google could block American Blind's trademarks "American Blind & Wallpaper Factory," "American Blind Factory" and "DecorateToday" from being used as keywords by other Google customers. But it said it could not block variant terms such as "American blind" or "American wallpaper " because these were descriptive terms that other advertisers had the right to use.

Google also said that its matching algorithms would return an ad for "American Blinds" if a user searched for a generic term such as "wallpaper." In January, American Blind responded with another letter reiterating its demand, and asking that Google specifically prohibit its competitor, The Blind Factory, from buying the disputed key words.

By November of this year, American Blind was threatening to "prepare a Vuitton-type lawsuit if the matter cannot be resolved." (On August 6 of this year, Luis Vuitton SA sued Google and its French subsidiary in France for trademark infringement arising from Google's posting of links to companies and other organizations that paid to associate themselves with certain keywords. The case has not yet been settled.)

Google has blocked other companies from using American Blind's registered trademarks as keywords, but, the complaint filed November 26 states, "Google believes and maintains that descriptive terms (including terms such as 'blind,' 'wallpaper' and 'factory,' which are component parts of American Blind's trademark) are not entitled to any such treatment, and that Google's sale of keyword-triggered advertising does not violate the Lanham Act."

Google asked for declaratory judgment that its AdWords don't infringe on American Blind's trademarks and demanded a jury trial.

It's a thorny issue, and one where there's no established law, said Martin Schwimmer, a Mount Pleasant, N.Y. attorney specializing in trademark and domain name law. "Context is everything in the way users perceive these terms," he said. In other words, while the term "wallpaper" may be generic, Google's AdWords appear in very specific context. "In fact," he said, "the Google requirements as to the content of an AdWord require context."

There is law in place regarding competitive advertising, according to Schwimmer. "Competitive traders are supposed to be allowed to fairly describe what they do. In this particular situation, we want traders to be allowed to say they sell wallpaper and to use descriptive terms to narrow what type of wallpaper they sell."

On the other hand, he said, trademark holders should be allowed to protect their trademarks in the context of search engines. For example, although "American" is a widely used term, you couldn't argue that "American Airlines" was a generic phrase. "It sounds like it's a case-by-case basis," Schwimmer said, "where you have to look at how the advertiser is using the trademarked term."

That adds up to a potential nightmare for Google: Evaluating keyword buys on a case-by-case basis obviates its automated system and could lead to huge amounts of inventory being taken out of play. While Google has agreed to remove other trademarked terms from its AdWords inventory, this case, said Schwimmer, "is about drawing the line."

The U.S. District Court, Northern District of California, could decide three different ways: that Google is infringing American Blinds' trademarks; that it's not; or that the matter isn't ready for judgment. In the latter case, American Blinds' next step could be to sue. But Schwimmer said that its protesting letters may have been a bluff to get Google to eliminate keywords it wasn't so sure it could defend. Google's filing calls that bluff.

It's a case, said Schwimmer, of colliding policies. Google has to protect its business model, while trademark owners need to vigorously protect their trademarks or risk losing them. "The question is, who owns traffic?," he said. "And it's about time we had a decision on this."